Tony Martinez of San Jose is all smiles because the house next door -- an empty ruin that was once occupied by five renting families -- is going to be fixed up and sold to responsible buyers.

Lucy Escalante is beaming because she has just moved into her dream home in South San Jose.

And Jean Bjork's contracting business has plenty of work at a time when construction jobs are scarce.

The three are benefiting from San Jose's "Dream Home" program, funded by the federal Department of Housing and Urban Development and run by the city of San Jose.

"I would really recommend it to whoever can get into it," said Escalante, who bought a home for $415,000 under the program, aided by a $40,000 loan for the down payment.

Through HUD's Neighborhood Stabilization Program -- first launched in 2008 during the Bush administration -- 400 cities and counties across the U.S. have received $7 billion to reduce foreclosure blight in hard hit neighborhoods. Foreclosed homes are rehabilitated and then sold to moderate income families who want a shot at homeownership.

But lately the program has hit some roadblocks in the Bay Area.

Increased competition from investors and fewer foreclosures by lenders have made it harder for the Bay Area's programs to successfully bid on homes to fix up. One Alameda County nonprofit, Hello Housing, has been outbid on 13 foreclosed homes recently.

That's "the biggest challenge we face," said Jennifer Duffy, Hello Housing's program director.

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And there are fears funding will dry up when the current grants are exhausted. Some of the cost of buying and fixing up a home is recovered when the home is sold, but typically not all of it.

Proposed legislation includes $15 billion for "Project Rebuild," a new version of the HUD program that also targets foreclosed commercial buildings. Advocates are looking for bipartisan support from a politically gridlocked Congress.

"We continue to be hopeful" that new funding will emerge, said Kara Douglas, affordable housing manager for Contra Costa County, which has rehabbed and sold 35 houses under a $6 million grant.

"We'll do what we can to serve as many families as we possibly can," said Janice Jensen, president and chief executive officer of Habitat for Humanity East Bay. "It's been a great public-private partnership. I wish it could last forever."

Targeting certain neighborhoods makes sense because more than half of all foreclosures are in just 10 percent of the country's census tracts, according to Craig Nickerson, president of the National Community Stabilization Trust, which helps cities and counties obtain foreclosed homes from banks.

In the past four years, Alameda County has fixed up and sold 38 foreclosed homes and San Jose's Dream Home program has purchased and renovated 47, selling 40 so far. A half dozen others are being rehabilitated.

Buyers are given help with down payments in the form of a loan that doesn't have to be repaid until the home is sold.

In San Jose, Community Rehabilitation Partners, formed by real estate agents Stephanie Golden and Weda Gray and contractor Bjork in 2009, has rehabbed about 33 houses so far, including the one Escalante and her husband bought in South San Jose last month.

Bjork Construction also has started work on the home next door to Martinez.

"By the time we get there everything has pretty much been stripped out of the house," Bjork said.

Martinez said the house sat empty for a year after being foreclosed on. Before that, five families rented rooms in it, he said.

"People were sleeping in the front room. Now, somebody will keep it nice like the rest of the houses here."